November 15 th , 2013

November 15th, 2013

Lafayette College Investment Club

Today's Agenda

• 1) Market Update • 2) Final Buy/Sell Allocations • 3) Debt Presentation • 4) Next Semesters Goals/ How to Get

Involved

Market UpdateRyan McCormick and Chris Busuttil

11/15

Yellen Confirmation Hearing

• Janet Yellen nominated to take over Fed• Longest tenured member of the FOMC• Similar style to Bernanke: maximum

employment, bank regulations• Must be confirmed by Senate Banking

Committee

Continued

• Yellen maintained Fed “status quo” – Limited information – Aimed at not disrupting the markets– Discussed new bank regulations that are designed

to help prevent another financial crises– Addressed weak employment data

Macroeconomy

• Quarterly GDP = 2.8% better than expected• Jobless Claims fell by 9,000 • Potential Headwind: GDP grew at only 2.1%

when accounting for business inventory

Euro-Zone Faltering

• Economy barely expanded in 3rd quarter• Grew .4% at annualized rate • Down from 1.2% annualized growth• What this means for U.S. economy:– Uncertainty – Net Exports suffer– Counterparty Risk

Market Activity

• AMR-US Airways set to merge• Baidu is sued – Video Piracy: four services firm provides are

involved in law suit– Issue: firm allows users to access to television

shows and movies that are licensed to other companies

• Starbucks-Kraft Foods settlement– Starbucks must pay ~$3 bn for ending partnership

Market Activity

• Snapchat refused $3bn ALL CASH offer from Facebook – Holding out for bigger offers, hoping that

investors will over look a service with no business model or any revenues whatsoever

• Cisco missed projections, expected growth 3%-5% posted 1.8%– Cite weakening demand in China

Market Activity

• US-Europe talks over trans-Atlantic trade regulations– Will decide how to handle trade of goods in terms of

safety and other qualitative concerns– Cars and Chemicals are two examples

• Firms are devaluing goodwill on unsuccessful acquisitions– Total amount of $51 bn in reductions across the board– Hewlett-Packard, Microsoft and Boston Scientific

The Eastern Company (EML)

Sell

EML SummarySector Industrial Goods

Industry Small Tools and Industrial Goods

Market Cap 102.34M

Employees 729

Beta 0.64

Products Industrial hardware, security products and metal castings

Examples passenger restraint locks, slam and draw latches, dead bolt latches, compression latches

Highly specific Market

• They perform niche function• Cannot directly compare with other companies• Highly unique combination of services– Industrial hardware segment: products are used in moving

vans, school buses, military vehicles, recreational boats etc.– Security products segment: timers, drop meters, coin

chutes, money boxes, etc.– Metal products segment: mine roof support anchors,

couplers for railroad braking systems, adjustable clamps for construction, and fittings for electrical installations

5 year Chart

Fundamentals - Profitability

2012 Q3 2012 Q4 2013 Q1 2013 Q2 2013 Q3

Gross Margin (%) 7.50 8.33 5.89 10.26 7.68

Net Margin (%) 5.00 5.56 2.86 5.13 5.88

Fundamentals - Liquidity

2013 Q3

Current Ratio 5.62

Quick Ratio 3.31

Working Capital 60.00

Working Capital Turnover 0.57

Operating Cash Flow 0.25

Fundamentals - Valuation

EML Industry Average

Price to Earnings 15.6 18.7

Price to book 1.4 2.5

Price to sales 0.7 1.4

Dividend yield (%) 2.4 1.4

Hypothesis - Background

• There are three reasons to own a micro cap equity– Growth Opportunity

• ???– Undervaluation

• P/E < 15• P/S < 1.0• Dividend (perk)

– Acquisition Potential• 116 Million in total assets vs. 5.3 Million in long-term debt• ???

Important Announcements

• Last Meeting of the Semester is today• HIGHLIGHTS• We bought and sold over 20 positions • We successfully implemented a strategy and

goal and completed it (2% allocations).• Had two extremely impressive and successful

speakers

Fixed Income

By Brendan Gover

What is a bond?• A piece of debt issued by a company, government etc. • Returns a fixed amount of cash to the investor based on an

interest rate (hence “fixed income”), then principal at maturity

• Equity vs. Fixed Income = stakeholder in firm vs. lender to firm

• Parts of a bond:– Principal – Coupon (interest rate)– Yield (rate of return)– Maturity date

How do they work?

• For a corporate example, we will examine GE• GE wants to raise capital and issues bonds• Underwritten (think Scott Littlejohn) and offered to the

secondary market (public)• Priced through the expected future cash flows from the

bond (DCF etc.)• Can be purchased and held or traded, among other

executions (converted if applicable etc.)• Interest is returned on a fixed time period with a fixed

value (usually), principal is returned at maturity

What is fixed income, in general, used for?

• Raising capital for large institutions• Safe investments for personal investors and

large institutions alike • Issuance of mortgages, senior/mezzanine debt

by financial institutions • LBO • Many, many, many other uses

Investing Strategies with Fixed IncomePersonal

• Municipal bond interest is not taxed • “100 – your age rule”• They are a very safe way to preserve and

increase wealth, whether a person is poor or rich

• Laddering: hedging maturity dates against each other so there is principal returned at different time periods

Investing Strategies with Fixed IncomeInstitutional/Bond Funds

• Large institutions (governments, banks, insurance companies, colleges) buy large groups of debt

• Often invest in a large group of a certain type of bond (GE bonds)

• Bond funds– Traders and PMs allocate government, muni and

corporate bonds to get the most out of the fund– They return a dividend as opposed to the actual

principal and interest

Conclusion

• Fixed income/debt is a very safe investment• Many variations of debt (type, yield, maturity, • Provides investors with a fixed return that

they can expect• Allows firms to raise large amounts of capital

quickly

The Board/Future Involvement

New Additions for Next Semester

• We have decided to diversify our food policy going forward.–More Details on that to come

• We have created t-shirts for club members who participate in presentations

• We are actively seeking new board members and people who want to be involved.

Positioned Opened Next Year

• We are graduating the following positions:• 1) President • 2) Vice-President• 3) Market Analyst• 4) Equity Analyst (They’re four total one is

graduating)• 5) Secretary• Total of 10 members

Frequently Asked Questions

• Frequently Asked Questions• 1) If I am not an economics major am I

allowed to be on the board?• 2) If I wasn’t active this past semester can I

still run for a position?• 3) What does the commitment entail?• 4) What opportunities come from being a

member of the board?

The Bottom Line• Voting is done at the end of the spring semester,

however, voting is usually done on the basis of your involvement and endorsement by current board members.

• You have to be involved in presentations, get your name and face out there.

• Weekly board meetings will be held open in the Spring (Mondays at 12:15 pm in Simon Lobby) all are encouraged to attend.

• All academic backgrounds and levels are encouraged to run.